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November 12, 2010

Alibaba Makes Internet Magic

The man behind China’s most successful Internet company tells what it took to succeed in a nation rife with censorship, and reveals the six-word management philosophy he’s followed since day one.


You may not have heard of the Alibaba Group, but investors, competitors and business leaders around the world are paying close attention. Formed 11 years ago by high school teacher Jack Ma, Alibaba.com is China's largest B2B Internet marketplace for small- and medium-sized companies. Other holdings include Alipay, an online payment service similar to PayPal; Alibaba Cloud Computing; and Taobao, a social networking and shopping site that Mr. Ma describes as a mash-up of Amazon, eBay and Facebook. But it's the flagship company, Alibaba.com, that has been the incubator for his sometimes-unorthodox ideas on management and product development.

"We don't think about making money," Mr. Ma said in September during the Sir Gordon Wu Distinguished Speakers Forum at Columbia Business School, sponsored by the Chazen Institute for International Business. "We think about creating value for society, for the people, and for the customer. And because we don't think about making money, we make money."

That might sound flippant coming from someone whose website raised $1.5 billion in 2007, making it the second largest Internet IPO in history (only Google's, at $1.67 billion, was larger). Today, market capitalization for Alibaba.com is nearly $10 billion, and Taobao has mushroomed into China's largest retailer by some measures. That's all the more remarkable considering that Mr. Ma operates in a country with some of the most restrictive Internet censorship policies in the world. Still, he has succeeded by adhering to one simple six-word tenet: customers first, employees second, shareholders third.

The Early Days

Dressed casually in canvas shoes and a white windbreaker, Mr. Ma recounted for the audience his childhood in Hangzhou, a major city in China's Yangtze River delta. He was, he said, a fan of wu xia (martial arts) novels, and often got into fistfights as a young boy. He picked up English on his own by acting as a tour guide for foreign visitors in exchange for language lessons, but because he had difficulty with math, he twice failed his general college entrance exams. On the third try, he was admitted to the languages program at the local university, after which he began a career teaching high school English.

But along the way, the entrepreneurial bug bit. He launched a translation service and was hired by an American businessman, who was bankrolling construction of a local highway, to translate negotiations with Chinese municipal authorities. Part of the deal-making called for him to travel to Las Vegas to meet some investors, and it was there, in 1995, that he first heard the word "Internet." He then travelled on his own to Seattle to visit VPN, a small Internet service provider with five employees. There he got his first look at the technology that would, within a decade, make him one of the most influential entrepreneurs in the world.

Fee or Free?

A key to his success, Mr. Ma said, was having a business model so simple that any customer could instantly understand it. Unlike eBay, which has a sliding scale of fees, plus commission if the item sells, Alibaba.com charges nothing for up to 50 product listings. "Chinese SMEs [small and medium enterprises] want to sell their products abroad," he said. "We help them create revenue." But what about Alibaba's revenue? That comes largely from annual membership fees that sellers pay to upgrade to "Gold Supplier" status, which gives them access to more buyers and an online storefront.

"A membership fee is something all SMEs understand," he said. "If you talk about transaction [charges], our P/E [price to earnings ratio] would go up, but customers wouldn't understand us. Our business model should be simple and easy enough for customers to understand." Taobao, meanwhile, has also steadfastly adhered to the "no transaction fee" philosophy, which caused it to leak money for several years. Recently, though, it began selling ad space on the site. Revenues have been high enough to push Taobao into the black, Mr. Ma said.

For the first five years of Alibaba.com, Mr. Ma was the site's chief quality control officer. Every feature of the site was put to one test: if he couldn't figure out how to use on his own, without explanations or manuals, it didn't get implemented. "I'm not a high-tech guy," he said. "My wife bought me an iPad and I still don't know how to use it." The site's design is deliberately no-frills: Clicking on the "categories" tab, for example, pulls up an easy-to-scan alphabetical list of items for sale, everything from fresh garlic to pipe fittings. New requests from buyers are prominently displayed and constantly updated. And for buyers who cringe at the thought of racking up a phone bill, there's a list of Chinese suppliers with toll-free numbers.

What's ahead for the Alibaba Group? Don't expect a foray into online gaming any time soon. "I don't believe in online gaming," he said, noting that his son and his friends spend hours after school glued to a computer screen. "We could make a lot of money on gaming, but I just don't want my kids to be focused online," he said. Instead, he said, the next big thing in China will be B2C commerce.

“The world is changing,” he said. “With so many consumers, they can say ‘I want my products tailor-made.’ This will fundamentally change the Internet.”

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